Dividend Growth Investing: Reflections On What I've Learned

It's roughly the mid-point for this year. The final 25% of our portfolio will be available to trade from the broker by the end of this week. Seems like a great time to reflect on just what I've learned in the past 6 months.

I retired the end of 2008 and began managing my own investments in February of 2011. I spent the first 6 months actively trading high yield stocks. Since my broker gave me thirty free trades each month, I felt inclined to use each and every one every month. It was all part of learning I guess. I watched Mad Money every night and religiously bought every recommended stock with a yield of 4% or more. When Cramer recommended sell I sold. I experimented with internet sites during the same period starting with Motley Fool before moving next to Zack's. At first things were going well, my portfolio was up and the dividends were providing necessary income. On June 1st however things started to go terribly wrong. By August 6th my portfolio was down 7% from where I had started in February. There was a lot of turmoil and uncertainty in the world and it was all being reflected in my portfolio.

Fortunately for me I began to shift from chasing yield to seeking safety. I sought out those dividend stocks that had performed the best during the bear market of 2008. It proved to be the right move since I end the year with gain of over 6% when the dividends I received as income were considered. It was during this same period that I first discovered Seeking Alpha and writers like David Van Knapp and commentary from folks like chowder and richjoy. During the months that followed I learned more than I can ever repay. Since then my portfolio has seen its greatest period of stability.

Early this year I did what every retiree investor needs to do. I downloaded the Excel Spreadsheets for the Dividend Champions, Contenders and Challengers (CCCs) from the website of SA Contributor David Fish. I now had a list of every US Stock with a history of sustained dividend and dividend growth some going back more than 50 years. At last count there were 451 stocks with at least five years of sustained dividend growth. From there I customized to meet my needs. After 2008 I don't trust US banks so I just removed them from my spreadsheet. Since my stocks are providing current income I passed on stocks with yields much under 3%. I removed most of those without a 5 year Dividend Growth Rate (DGR) greater than inflation. Payout Ratios, P/Es and Betas were also considerations for what stayed on my list. My revised list now contains less than 150 stocks including those in my current portfolio.

I backtested looking for stocks that would help me and my lovely wife "sleep well at night." In my first series of articles for Seeking Alpha I presented the findings from that search, 50 of the most stable dividend performers between 2001 and 2011. These along with others from the lists of Dividend Champions, Challengers and Contenders make up the core of a dividend growth portfolio that I expect will prove a stable stream of income for the remainder of my life and will continue to serve my family well after I'm gone.

During the past year I grew a lot as an investor in retirement. I went from chasing yield to seeking a stream of growing dividends. I no longer worry whether my wife and I will outlive our portfolio. The 4% withdraw rule is now no longer a concern as my income from dividends alone provide income exceeding this amount. Inflation is not a concern since my dividend income grows at a rate more than twice that of inflation. Since it's about capital preservation and dividend growth rather than capital gain, my bets don't have to win the race, they just have to finish.

I don't have to worry about whether the market goes up or down, just whether each of my holdings maintains a reasonable payout ratio, based on its peers and has a growing sustainable dividend.

I'm most comfortable with an equal weight portfolio with each stock representing between 2 and 3% of the total portfolio. I feel this arrangement helps to safeguard against the effects of a stock having a large dividend cut affecting my monthly income. It may be more stocks than some of you are comfortable holding but it works for me. My goal is to keep my dividend yield at a minimum of between 4 and 5%.

I currently have a 50 stock, equal weight portfolio. In addition to stocks from the CCCs I have a few 2% positions in stocks I expect to be on the Dividend Challenger list soon: PM, DPS and BGS. All three have a nice combination of current dividend yield and solid dividend growth. Finally I have three 2% positions in MReits that I watch closely to help increase yield: AGNC, MTGE and AMTG. These positions are likely to remain my most closely monitored.

I'm approaching investment like a business. Thanks to David Van Knapp I have a business plan with goals and buy and sell guidelines. I'll present this along with more information on my current portfolio next time around.

I want to encourage each of you to share your own insights from reflection, particularly those who are retired and have yet to comment. It was from my comments and questions that I learned so much from those generous enough to share their experiences.

Is this approach to investing right for everyone? Hardly! Is it right for me? Damn right it is! I did give up a lot when I made the decision to adapt this approach to investing. First, I no long need my thirty free trades a month my broker provides. Second, I don't watch Mad Money each night and never for more than the opening segment. Three, Motley Fool is a thing of the past. And as for our sleep….Sound as our grandkids.

Disclaimer: I am not a professional investment advisor or financial analyst. You need to do your own research and due diligence before you decide to trade any securities or other products.